Exchange-traded funds offer plenty to investors. The ability to buy and sell a bundle of stocks with just one trade makes it easier to balance your portfolio, play entire industries or even track the whole stock market.
Of course, some perks come with a price: the oft-overlooked expense ratio. Just like mutual funds, an ETF’s expense ratio is what you’re paying a company to put together this convenient trading vehicle. The cost is baked into the fund’s returns, and the money goes toward paying the manager if it’s an actively managed fund, marketing materials, keeping the company’s lights on, you name it.
Some funds are pretty simple, and the price reflects it. For instance, Vanguard S&P 500 ETF (NYSE:VOO) lets investors simply track the S&P 500 for a thrifty 0.06% expense ratio. If the market goes up, VOO goes up. Nice and simple.
But if you want to make some more creative plays, you’ll have to pay. A number of funds let you double or triple your returns, put fund managers to work selectively shorting stocks or even let you trade fear itself — but they’re also among the highest-priced funds out there. Here’s a look at the seven priciest expensive exchange-traded funds (as listed by etfdb.com):
Silver and Gas Funds
One thing that can bulk up a fund’s price tag is leveraging. It’s one thing for a fund to just buy a few stocks and hold them. It’s another to try to finagle a return of three times the inverse of an index — without holding anything.
Four VelocityShares funds do just that — for a hefty 1.65% charge:
- The 3x Inverse Silver ETN (NYSE:DSLV)
- The 3x Long Silver ETN (NYSE:USLV)
- The 3x Inverse Natural Gas ETN (NYSE:DGAZ)
- The 3x Long Natural Gas ETN (NYSE:UGAZ)
The “ETN” designation is important to note. Unlike an exchange-traded fund, exchange-traded notes don’t actually hold a basket of equities. Instead, they use kinky derivatives to tie their performance to various indices, tracking things like bonds or commodities. In this case, DSLV and USLV are tethered to silver futures — unlike the iShares Silver Trust (NYSE:SLV), which simply holds physical silver. DGAZ and UGAZ move based on natural gas futures.
While the headline number is high, the expense ratio for these funds isn’t much of an issue. Funds that offer multiplied returns typically are used to make short-term bets in hopes of big payoffs. What investors should keep in mind, however, is that these bets have massive downside potential. If you’re wrong with USLV, you’re triply wrong. So, before trading for any 2x or 3x fund, determine what kind of losses you can cover, and set an appropriate stop-loss.